BF Flashcards
(40 cards)
When a firm buys capital equipment the cost of the transaction cannot be used like an operating expense to reduce corporation tax because:
(a) The supplier has already paid tax before the purchase.
(b) Purchasing capital equipment makes no change in total value of the firm, it simply changes it from one form to another.
(c) Corporation tax is not used as a disincentive to investment.
(d) Corporation tax is only applied to sales income and nothing else.
B)
Purchasing capital equipment makes no change in total value of the firm, it simply changes it from one form to another.
You have shares in three companies A, B and C. When you made the investment, you placed 25% your funds in A, 30% in B and the rest in C. The return, since investment, on A’s shares has been 10%, while on B’s shares it has been 30% and on C’s shares it has been 15%. What is the return on the whole investment?
(a) 22.50%
(b) 18.25%
(c) 17.25%
(d) 11.50%
Return on portfolio
B) 18.25%
3: A company has a capital structure made up of three components. The components, their proportions and the annual rates of return expected by the investors are:
Component Proportion Expected annual return
Preference shares 10% 8%
Ordinary shares 50% 20%
Bank loan 40% 5%
If the corporate tax rate is 20% what discount rate should the company use when valuing projects with the NPV method?
(a) 10.24%
(b) 11.4%
(c) 12.4%
(d) 12.8%
C) 12.4%
If investors using technical analysis (chartists) get higher returns than investors who simply select random investments then the market is best described as:
(a) weak form efficient.
(b) strong form efficient.
(c) not efficient in any form.
(d) semi-strong form efficient.
(c) not efficient in any form.
5: I buy a machine to use in my business. It costs £2000 and I can claim capital allowances on a 40% per year declining balance basis. Two years after purchase I sell the machine for £900. How much capital allowance am I allowed for that year?
(a) £300
(b) £320
(c) £720
(d) £1200
(a) £300
In a rights issue of shares an offer of 3 new shares for every 40 currently held is made at a price of £7.00 per share. The current share price is £8.00. What should a shareholder be able to sell one of their rights for?
(a) 100 pence
(b) 93 pence
(c) 7 pence
(d) 50 pence
(b) 93 pence
A bank has two types of deposit account.
Account A offers a standard 3% per annum and is guaranteed to have that rate for at least the next 5 years.
Account B, for any continuously held deposit, offers an interest rate of 2% per annum for two years and 4% per annum after that. Any break in deposit will put you back to the 2% rate for 2 years.
You want to save for exactly three years. What is your best strategy.
(a) Two years in Account A then transfer the contents to Account B.
(b) Two years in Account B then transfer the contents to Account A.
(c) Three years in Account A.
(d) Three years in Account B.
(c) Three years in Account A.
8: Your business is subject to changing financing costs. The discount rate that applies over the next year is 30% while the discount rate that applies to the following year is 15%. What is the present value of a cash-flow of £500,000 to be received in two year’s time?
(a) £295,858
(b) £378,072
(c) £334,448
(d) £500,000
(c) £334,448
Two firms are identical except for their capital structure. One of the firms is all equity financed and the equity value is £60 million. The other firm has debt financing of £25 million. If corporation tax is 20% what is the value of the firm that has debt?
(a) £65 million
(b) £72 million
(c) £37 million
(d) £60 million
(a) £65 million
I have 1000 shares in a company that decides to raise more equity capital through a rights issue. The current market price of my shares is £10.00. The rights issue offers 1 new share, at £9.00 each, for every 40 already owned. If I buy all the shares I am offered what is my total investment in the company after the rights issue is completed?
(a) £10,450
(b) £10,000
(c) £10,360
(d) £10,225
(d) £10,225
11: The directors of a company need not worry about their shareholder’s wishes with regard to dividend payments because:
(a) it is not their job to set the level of dividend payments.
(b) shareholders can effectively adjust dividend levels themselves.
(c) only some of the shareholders will be happy whatever they do.
(d) shareholders don’t buy shares for the dividends.
(b) shareholders can effectively adjust dividend levels themselves.
Before tax a firm expects to have the following taxable cash flows which occur at one year intervals:
Year 0 Year 1 Year 2 Year 3
£150,000 £300,000 £180,000 £350,000
If the present value of these, at the firm’s discount rate, is £677,584 what will be their post-tax present value? The corporate tax rate is 20%.
(a) £582,476
(b) £846,980
(c) £542,067
(d) The problem cannot be solved without knowing the discount rate.
(c) £542,067
13: A company’s capital structure is 60% equity. The interest payments on its debt are 10% p.a. and the WACC is 15% p.a. What is the cost of capital of equity given that no taxes need to be paid?
(a) 27.50% p.a.
(b) 47.50% p.a.
(c) 31.66% p.a.
(d) 18.33% p.a.
(d) 18.33% p.a.
A Z-score is created from a company’s financial data and used to:
(a) assess the risk of failure in the near future.
(b) rank firms in order of profitability.
(c) provide information to shareholders on the dividend they might expect.
(d) compare a rival firm’s compatibility prior to a merger or takeover offer.
(a) assess the risk of failure in the near future.
15: A company has 5,000,000 ordinary shares on the market of nominal value £0.25. The shares are currently trading at £7.00 each. All of the equity in the company is in the form of ordinary shares. The total equity is:
(a) £36,250,000
(b) £33,750,000
(c) £1,250,000
(d) £35,000,000
(d) £35,000,000
16: You have £100,000 and you use it to buy an annuity at a rate of 5% p.a. that will pay you a fixed sum at the end of each of the next 12 years. What should that fixed annual sum be?
(a) £8,863 p.a.
(b) £11,283 p.a.
(c) £8,333 p.a.
(d) £14,965 p.a.
(b) £11,283 p.a.
17: Any member of the public can buy or sell shares at the London Stock Exchange:
(a) Directly by simply having an account at the exchange.
(b) By contacting the company whose shares they want to trade and arranging the trade through them.
(c) By using a member of the exchange, acting as a broker.
(d) By using a member of the exchange, acting as a dealer.
(c) By using a member of the exchange, acting as a broker.
18: A firm has equity of £50 million and debt of £20 million. The corporate tax rate is 20%, the required return on equity is 15% p.a. and the interest payable on the debt is 5% p.a. What is the WACC?
(a) 16.60% p.a.
(b) 11.86% p.a
(c) 3.39% p.a.
(d) 12.14% p.a.
(b) 11.86% p.a
19: A future cash flow is given in real terms if:
(a) it is given in terms of the actual cash amount that it is thought will be paid in the future.
(b) it is given in terms of today’s money values and ignores inflation.
(c) it takes account of inflation up to the time of the cash flow.
(d) it differentiates between investments in real assets and financial assets.
(b) it is given in terms of today’s money values and ignores inflation.
20: A 1-for-10 rights issue is used to raise new equity finance. The pre-rights market price of the shares is £2.25 and the rights issue offer is for £1.40 per share. What should the post-rights share price be?
(a) £1.40
(b) £2.25
(c) £2.39
(d) £2.17
(d) £2.17
21: The weak form of the efficient market hypothesis (EMH) states that investors will get no evidence to indicate that the market price of a traded security is not correct by analysing:
(a) all published information about the company and other financial news.
(b) its price history.
(c) the trading activity of the company’s directors and managers.
(d) its published accounts.
(b) its price history.
22: A company decides to change its capital structure so that a smaller proportion is in the form of debt. If the ideas of Modigliani and Miller are correct how do you expect this decision to be reflected in the cost of capital of equity?
(a) It will be unaffected.
(b) The effect cannot be predicted from the information given.
(c) It will increase.
(d) It will decrease.
(d) It will decrease.
An investment opportunity consists of an initial investment of £1000 followed by perpetual receipts of £400 at annual intervals from the investment date. The receipts are taxable at a rate of 30%. If the investors’ required rate of return is 15% per year what is the NPV of this opportunity?
(a) £280
(b) £757
(c) £870
(d) £867
(d) £867
24: End of year costs for services you are buying over the next two years are estimated to be:
Year 1 Year 2
£20,000 £10,000
You would prefer two equal end of year payments instead. If the discount rate that applies is 20% what annual sum would you expect to be equivalent to the current scheme?
(a) £15,455
(b) £15,000
(c) £16,544
(d) £12,545
£15,455 large numbers of investors need to believe they can find inefficiencies. Trading to exploit these is what makes the market efficient.
